Payroll Practices and Procedures Checklist

Author: Alice Gilman

When to Use

At the end of every calendar year, employers are responsible for closing out the year's payroll in compliance with all federal, state and local income and employment tax laws, regulations and procedures. Also, when each new year begins, they must be ready to comply with any legal and procedural changes taking effect and ensure their payroll systems are updated.

To prevent the process from becoming overwhelming, an orderly and methodical plan of payroll practices and procedures should be mapped out and followed not only at the end and beginning of each year, but throughout the entire year.

Using the following checklist in every pay period and every month (in month order) will help an employer stay in control of payroll responsibilities all year long and easily tackle year-end and new-year challenges.

Year-End 2023 and 2024 Changes

The year-end process for 2023 and into 2024 continues to challenge employers, in part due to lingering effects of COVID-19.

Deferred Social Security Tax Deposits

The Coronavirus Aid, Relief and Economic Security (CARES) Act allowed employers to defer the deposit of their share of Social Security taxes for 2020. The first repayment was due by January 3, 2022, and the final repayment was due by January 3, 2023. However, the Treasury Inspector General for Tax Administration (TIGTA) reported that, as of December 2022, the Internal Revenue Service (IRS) had not adjusted all of the tax accounts it identified as not having fully paid the required deferral by January 3, 2022. This is significant, because there is some ambiguity regarding how the IRS will assess failure-to-deposit penalties on the missed deferral:

• An IRS Chief Counsel memorandum concluded that if any portion of a deferral is not paid back in full and on time, the entire deferral, including amounts that would be due in 2023, is invalidated. That would make an employer’s deposits delinquent back to the original deposit date and subject to a 10% failure-to-deposit penalty on the entire amount deferred.
• Subsequent guidance released by the IRS’s Small Business/Self-Employed Division, which has jurisdiction over payroll taxes, notes that the penalty would be assessed on the tax underpayment only, as opposed to the entire deferral. In addition, the deposits would neither be delinquent back to the original deposit date, nor would the entire deferral be invalidated.

In response to the TIGTA report, the IRS will continue to identify deferrals through at least 2024. That means the extent of a delinquent employer’s failure-to-deposit penalties is uncertain. Therefore, employers should check their records to ensure they have paid back their deferrals in full and on time. For employers that may be subject to a failure-to-deposit penalty, it is important to review any penalty notice to determine the underpayment on which the penalty is levied.

FUTA Credit Reduction

In 2020, many states borrowed heavily from the US Department of Labor to pay unemployment benefits during the COVID-19 economic downturn. However, it is likely that California, Connecticut and New York will not be able to pay back their loans as required by November 10, 2023. Therefore, employers located in those states will have higher payroll costs as their full 5.4% Federal Unemployment Tax Act (FUTA) credit will be reduced by 0.6% for 2023. The additional tax is due with the 2023 Form 940, which they must file and pay by January 31, 2024 (or February 12, 2024, if they have deposited all FUTA taxes on time throughout the year).

Employee Retention Credit

Employers could continue to claim the COVID-19-related Employee Retention Credit (ERC) against wages paid and health benefits provided to qualified employees through September 30, 2021. Although the ERC expired, employers reviewing their books now and realizing they either qualified for a tax credit they did not take or that their tax credit calculations were incorrect may still claim or adjust them by filing Form 941-X for 2020 claims by April 15, 2024, and for 2021 claims by April 25, 2025 .

However, the IRS has identified such pervasive ERC fraud on Forms 941-X that it has suspended processing of those forms on which the ERC is claimed through at least the end of 2023. The IRS will process Forms 941-X that were filed before September 14, 2023, but employers are cautioned that processing time will be at least double what it would normally be as the IRS roots out fraudulent ERC claims.

Employers may also be asked by the IRS to substantiate their ERC claims. Therefore, employers should work only with trusted third parties to complete Form 941-X and request a detailed worksheet from the third party explaining their eligibility for the ERC and the computations used to determine the ERC amount.

Electronic Filing Threshold for Information Returns

The IRS issued final regulations that decrease the mandatory electronic filing threshold for information returns (e.g., Forms W-2, 1095, 1099) to a combined total of 10 or more returns beginning with 2023 returns filed in 2024. These regulations also require employers to electronically file corrected returns (e.g., Forms W-2c) if they must electronically file their original returns.

Employers that have never filed Forms W-2 electronically before must obtain credentials from the Social Security Administration (SSA) by registering with Business Services Online.

To facilitate electronic filing of Forms 1099 by small employers that were never before subject to an electronic filing mandate, the IRS has a new simplified electronic filing platform for Forms 1099 called the Information Returns Intake System (IRIS). IRIS is limited to employers that file up to 100 Forms 1099 per submission. IRIS allows employers to key in information and it generates the copies they must file and send to recipients. The platform also presents a comma-separated values (csv) template employers can use with spreadsheet programs.

Employers must register separately for Transmitter Control Codes to file Forms 1099 with either the IRS’s Filing Information Returns Electronically (FIRE) system or IRIS.

Employers must obtain a separate TCC for the IRS’s AIR system for filing Forms 1095, including Forms 1095-B.

Since it takes some time for the SSA’s and the IRS’s registration process to be completed, employers are advised to register in the Fall.